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MOSL: APL APOLLO TUBES (Buy) (Initiating Coverage): The new normal!; Buy with TP of INR2065, 21% upside

APL APOLLO TUBES (Initiating Coverage): The new normal!; Buy with TP of INR2065, 21% upside

(APAT IN, Mkt Cap USD2.9b, CMP INR1702, TP INR2065, 21% Upside, Buy)

 

APL Apollo Tubes (APAT) is the largest manufacturer of Structural Steel Tubes in India, which finds applications in residential and commercial buildings, warehouses, factories, Agriculture, and other Infrastructure works. It enjoys ~50% market share in India, and operates through a network of 10 plants, over 800 distributors, more than 1,500 SKUs, and 200,000 fabricators serving over 50,000 retailers. 

• APAT's diversified product portfolio and pan-India presence helps in mitigating concentration risk. Higher sweating of assets (capacity utilization at 63%) will lead to kicking-in of operating leverage and better profitability. Robust distribution network, along with warehouses, higher retail network, and SKUs are expected to improve last-mile connectivity.
• The company is the fifth largest player globally and leader in the domestic market, with an aggregate capacity at 2.6MMT. Steady capacity addition, increase in penetration, and gains from unorganized players are expected to improve market share from current levels (~50%).
• The merger with Apollo Tricoat Tubes' (Tricoat) is margin and RoE accretive and is expected to create value for shareholders. Common ad spends and distribution network, along with other synergy benefits, is expected to benefit APAT in the medium-to-long term. Tricoat's EBITDA/MT is 1.7-1.9x higher than blended EBITDA/MT, and is expected to further increase revenue share of VAP, improve overall margin, and further de-commoditize the business.